Tuesday, January 15, 2013

This article was featured as a part of the Tuck-IIPM-B&E Joint Study cover story on 'The Worst CEOs of 2012' that appeared in the January 2013 issue of Business & Economy magazine

The only thing that can perhaps be worse than hiring the wrong employee is hiring the wrong leader. In this incisive analysis, PROF. ARINDAM CHAUDHURI, HONORARY DIRECTOR, IIPM THINK TANK and PROF. A. SANDEEP, GROUP EDITORIAL DIRECTOR, PLANMAN MEDIA, identify 10 CEO traits that are an agglomeration of bad news for the companies that they lead.

It’s the position that makes the most bucks. But then, it is also the position where the buck stops rolling. The CEO is answerable to every stakeholder imaginable for the success or failure of any operation/division; be it marketing, HR, operations or finance. He takes decisions, sets the direction and sets the organisation up to execute on his strategy; and can be the critical difference between a company that ups the ante and one that falls of the cliff.

The traits that define a good CEO have been the subject of scrutiny and debate over several years, but it remains largely unresolved. That’s certainly bad news for corporate boards, who would want to go to any extent to ensure that they have the right man. Based on exhaustive research and industry interface over the years, we present an expansive primer of 10 typical traits of unsuccessful CEOs, which should act as red flags for any company.

#1 THE BEST ONE-TRICK PONY YOU MET

To be true, multi-tasking is a way of life today, but one really wonders if it is the trait that should be associated with CEOs. If you look at expert analysis, CEOs looking to specialise in one area, with the belief that it leads to better efficiency and performance, need a very urgent reality check. Dr. Louis Csoka published a benchmark report titled ‘International Communications Research in December 2006, which proved that multi-taskers were not only more educated in comparison (78% more) but were also better paid (200% more!). It is also affirmed in a research by Dr. Levenson (University of Southern California), Dr. Gibbs (Chicago Graduate School of Business) and Professor Zoghi (Bureau of Labour Statistics) titled, ‘Why Are Jobs Designed The Way They Are?’, that in world leading organisations, ‘multi-tasking’ “leads to greater productivity” as compared to specialisation. One case in point is highlighted in the NHS Report from Institute for Innovation and Improvement, which wrote of Microsoft founder Bill Gates, “Gates is the original multi-tasking man...” In fact, Gates’ belief in multi-tasking is so supreme that “once, Gates hung a map of Africa in his garage, so he could have something to occupy his mind for the precious seconds spent turning on the engine of his Porsche.” In other words, there is a significantly high probability that single/limited tasking CEOs would easily find their way into the ignominious list of worst performing CEOs.

#2 LET’S BE HISTORY TOGETHER!

Does your organisation revolve heavily around one power figure, with his immediate deputies leading the rest in following his cue blindly on every occasion? If that be the case, you must delink from this organisation at the earliest opportunity. The right CEO is one who identifies potential insiders and grooms them relentlessly into leadership positions, and keeps a list of potential successors ready. The wrong CEO, simply put, is one who does not do that. Global HR consultancy Heidrick & Struggles reveals an interesting research finding, which states that “merely announcing who your next CEO will be, can move the market value of your company by 5% or more!” Centre for Economics & Business Research also proved in its benchmark research of 350 FTSE firms in 2005 that firms with unplanned succession planning for CEOs underperformed their counterparts, who had proper succession planning in place.

Sir Li-ka Shing, Chairman, Hutchison Whampoa has built a
multi-billion dollar empire that’s over $90 billion in mcap.
Interestingly, he started off as a watch salesman at the age of 14

Additionally, though it is bad news for head hunters, the best candidate to succeed you is most likely within your organisation. Hay Group has concluded from a 2007 research that around 80% of Fortune Most Admired Companies prefer internal candidates. Even Booz Allen concluded in 2008 that 80-83% of new CEO hires are normally insiders. In another study titled Crest of the wave, they found, after processing data from 2500 of the world’s largest firms that almost 30% of firms that showed negative performance outcomes roped in external CEOs, but the figure was only 6% for positively performing ones.

#3 THE MORE THE ZEROS...

Just like more risk is assumed to be better, one is tempted to believe that CEOs who demand higher pay packets are greater achievers. But both premises are structurally faulted. Profs. Michael Jensen (HBS) & K. Murphy (University of Rochester) analysed the paychecks of 2,505 CEOs of 1400 companies over a span of 15 years and concluded, “The compensation of top executives is virtually independent of performance.” In fact, one can even observe a negative correlation between CEO entry and exit packages and corporate destinies. The revealing Forbes report on CEO compensation acknowledges that the top 100 earning CEOs over a five year period were nowhere in the top 10 ranks on the efficiency index. In fact, the top 10 on efficiency didn’t even make it to the top 130 in terms of compensation! A Booz Allen Hamilton report titled, “Reining in the Overpaid (and Underperforming) Chief Executive” quotes corporate governance expert Nell Minnow, who is severely critical of the CEO compensation approach adopted by boards of Citigroup, Merrill Lynch, et al, thus, “These CEOs were guaranteed outsized exit and separation packages, regardless of how their firms performed. All CEOs who failed got paid very well.” The Corporate Library published a report, “Pay for Failure: The Compensation Committees Responsible”, in May that revealed that eleven publicly listed companies – AT&T, BellSouth, HP, Home Depot, Lucent, Merck, Pfizer, Safeway, Time Warner, Verizon and Walmart – gave a total compensation of $865 million to their shareholders between 2001 and 2006. And these CEOs led a total shareholder wealth erosion of $640 billion during the same period.

#4 THE CEO NOBODY KNOWS ABOUT

We instantly associate Henry Ford with Ford Motors, Bill Gates with Microsoft, Steve Jobs with Apple, Mark Zuckerberg with Facebook and Michael Dell with Dell Computers (and vice versa). CEOs who can’t be the ‘face’ their company needs to project to the outside world must bail out at the earliest. Prof. Nicholas O. Rule and Prof. Nalini Ambady of Tufts University did a benchmark analysis of the top 25 and bottom 25 companies on the Fortune 1000 list. They concluded, “Participants’ naive perceptions of leadership ability from CEOs’ faces are significantly related to how much profit those CEOs’ companies make... CEOs from more versus less successful companies could be distinguished via naive judgments based solely on perceptions of the CEOs’ facial appearance.” You know so many American CEOs by face and name, but few can recall any Japanese CEOs apart from, perhaps, Akio Toyoda. Is that why the Japanese economy refuses to revive even after so many years? In other words, CEOs who refuse to become the positive face of their companies might ensure that investors’ perceptions of their companies are negative, thus reducing stockholders’ wealth significantly.

#5 CORNER OFFICE OR IMPERMEABLE SHELL?

CEOs who fail to consistently communicate with their employees will soon find themselves leading a team of headless chickens guided by myriad unofficial grapevines and sans direction. Boston Consulting Group reiterates in its report Creating People Advantage In Times Of Crisis that clear communication is the key trait of outstanding leaders when the times are bad. In a May 2009 research publication titled “Formal and Real Authority in Organizations: An Empirical Assessment”, Feng Li, Venky Nagar & Michael Minnis (University of Michigan) and Madhav Rajan (Stanford) concluded that CEOs who communicate more consistently had more of “real authority”. Charles Coffin, ex-CEO, General Electric, was ranked #1 by Fortune in its list of “10 Greatest CEOs of all times”. He consistently communicated with sub-par employees with overwhelming success. Jim Collins wrote that Coffin “created a system of genius that did not depend on him – he created the idea of systematic management development.” Even Steve Jobs believed that marathon meetings with employees were a must for superlative performance, sans exceptions.

Alan Mulally, President & CEO, Ford Motors: Mulally has been unabashedly autocratic with Ford’s employees, but he has also been exceptionally successful

Professors Raffaella Sadun (Harvard Business School), Luigi Guiso (European University Institute), and Oriana Bandiera & Andrea Prat (London School of Economics) studied the daily time tables of 94 top European CEOs and concluded, “The vast majority of a CEO’s time, some 85%, was spent working with other people through meetings… while only 15% was spent working alone.” That, in itself, should rule out a leader who spends most of his time leading himself.

#6 WHO NEEDS A B-SCHOOL?

Do MBAs necessarily make better CEOs? There are numerous arguments to the contrary, but they couldn’t be further from the truth. Spencer Stuart’s Route To The Top survey, 2008, affirms that an overwhelming 62% of S&P 500 CEOs have a minimum of one advanced degree (MBA, Master’s, Doctorate etc). At the Bachelor’s level, BBA was the second most common qualification for S&P 500 CEOs after engineering. Dr. Stephen Long, who is a popular leadership coach to Fortune 500 companies and NFL teams, joins many industry leading voices in favour of MBA education for CEOs when he asserts, “Management education teaches CEOs the ultimate there is in managing a company and managing employees. It is not important. It is necessary.” Jack Welch, one of the most outstanding shareholder wealth creators in corporate history, steadfastly supports hiring MBAs, even though he isn’t an MBA himself! In other words, choose MBA CEOs over non-MBA CEOs – a non-MBA CEO could end up not creating as much shareholders’ wealth as an MBA CEO. In the path-breaking research titled Managing With Style, MIT Professors Marianne Bertrand and Antoinette Schoar – after undertaking a most massive research over 7,500 of the world’s leading corporations – proved most conclusively how companies with MBA CEOs perform better than those having non-MBA CEOs. The report statistically shows how “the most interesting finding is the positive relationship between MBA graduation and corporate performance.”

#7 THE SOFT ‘READY WHEN YOU ARE’ CEO

Nobody loves authoritarian leaders who invite comparisons with Hitler and the Third Reich. But the cookie crumbles differently now, and you should be hating the gentle, indecisive ones instead! Harvard Business School, in its report titled “Harley’s Leadership U-turn”, deliberated on the authoritarian tendencies of Harley Davidson CEO Rich Teerlink, who rescued the company from near extinction. It surmises that in critical situations, authoritarian leaders are the right choice.

(Left) Lakshmi Mittal, Chairman & CEO, ArcelorMittal and (Right) Late Steve Jobs, ex-CEO, Apple: Their grand visions and passion for excellence have been the driving force that has propelled their respective companies to industry leadership

The same was reiterated by Dr. J. Howard Baker of University of Louisiana, who said that authoritarian leadership was a must for “stopping something, destroying something, or conquering something...” in his paper, “Is Servant Leadership Part of Your Worldview?” The commanding natures of Jack Welch (GE), Alan Mullaly (Ford Motors), Lou Gertsner (IBM) and Steve Jobs (Apple), were a key aspect of their success.

Combined with this is the issue of narcissism. Everyone would love a CEO who cares for other’s opinions and engages in participative decision making. However, if research has to be considered, investors shouldn’t touch companies that are led by such CEOs with a barge pole! A 2004 report released by Harvard Business Review titled, ‘Narcissistic Leaders – The Incredible Pros...,’ states, “Many leaders dominating business today have what psychoanalysts call a narcissistic personality. That’s good news for companies that need passion and daring to break new ground.”

The report highlights that if narcissistic CEOs like Jack Welch and George Soros are at the helm, organisations can look forward to transformative changes led by “compelling, even gripping visions...” On the other hand, CEOs who are overtly participative and opinion seeking will fail at bringing in such changes, especially when organisations need them most. Prof. Chatterjee and Prof. Hambrick of Penn University also asserted in a May 2006 study titled ‘Narcissistic CEOs...’, that narcissism in CEOs “is significantly positively related to several (desirable) company outcomes, including strategy dynamism.

#8 THE GUT FEEL CEO OR THE DATA DRIVEN CEO?

How true is the adage “Nothing ventured, nothing gained” in the real world? Indeed, a number of successful CEOs take important business decisions from ‘gut feel’ rather than relying on actual data and future projections. And they are not necessarily wrong. Prof. William Duggan, Senior Lecturer, Business & Management, Columbia Business School, writes, “Analysis & creativity work together in the whole brain to give you a creative idea that makes analytical sense in a flash of insight. This is what we call intuition - gut feeling.” Professor Smith (Surrey) and Erella Shely (Academy of Management Executive) have concluded from their research that executives view intuitive decisions as actually being “expertise that has been built up... and influences conscious thought and behaviour.”

Moreover, accuracy of data is always debatable. The PwC Global Data Management Survey 2004 illustrates that companies are increasingly tentative for their own data and even more skeptical when they get data from external sources. But this does not mean that higher risks necessarily mean higher returns. Professor T. J. Kamalanabhan (Universiti Telekom, Malaysia) and Dr. D. L. Sunder (IIT Madras) affirm in their 1999 paper, ‘Managerial Risk Taking: An Empirical Study’, “Considering that managers are aware of their organisations’ resource constraints, moderate risk taking is eminently rational.” CEOs interviewed in a 2005 global survey conducted by KPMG titled, ‘Risk Taker, Profit Maker?’ admitted that ‘Poor Forecasting’ and ‘Poor Risk Identification’ were the leading culprits behind falling margins. So both extremes – CEOs relying too much on gut feel and CEOs waiting too long to have data in their favour – are bad bets for organisational leadership.

#9 THE CEO WHO NEEDS TO SEE THE OPHTHALMOLOGIST

Not having a vision is bad enough, but having one that is vague and utopian is worse. Further still, a failure to clearly articulate the vision to the organisation’s employees means that your current CEO turned into a debilitating liability yesterday. Vision is the power that can propel people like Sir Li Ka-shing, who started his career at the age of 14 as a watch salesman, to towering heights. He is the richest man in Hong Kong today (net worth of $27.5 billion as per Bloomberg Billionaires Index, 2012), who oversees an empire that’s over $90 billion in mcap.

Iconic management guru Jim Collins has concluded from his world class research (from his bestseller Built to Last) that the stock returns accrued from visionary companies were 700% more than their not-so-visionary counterparts. The Ken Blanchard group surveyed over 2000 respondents between 2003 and 2006 and found that the worst mistake ever for a CEO was the inability to communicate a vision in a “meaningful way”.

#10 PASSION, PASSION, PASSION!

What worth is a CEO who hates to part with the status quo and keeps most modest and achievable goals for his organisation? Well worth a replacement, we would say! The right CEO has to be immodestly entrepreneurial and ready to keep pushing the envelope intelligently. Peter Drucker asserted that no organisation can stay ahead on the innovation curve, unless it is filled with die-hard entrepreneurs who find the prospect of creation too good to resist. And passion is the key trait that distinguishes an entrepreneur/intrapreneur from the conventional manager. Renowned research firm Harrison Group has proved in a research paper (published in a Microsoft research release in May 2007 titled ‘The Rich Have Money – And Passion’) that around 70% of America’s big family fortunes were created less than 13 years ago (which means they are not inherited) and “the people who amassed those fortunes are primarily entrepreneurs – risk takers for whom wealth is a by product of pursuing their passion!” When Dr. Jonathan Byrnes from MIT took upon himself the task of highlighting the eight essential characteristics of transformational leaders, he put “capacity for passion” at the top, after a detailed international research. Renowned management guru Guy Kawasaki believes that true entrepreneurs can get the best people by just communicating their passion, rather than committing hefty pay packages. Passion has been one of the greatest strengths of the likes of Bill Gates, Michael Dell, Larry Ellison & Jack Welch.

Saturday, January 12, 2013

This article was featured as a part of the Tuck-IIPM-B&E Joint Study cover story on 'Reverse Innovation and Exnovation' that appeared in the October 2012 issue of Business & Economy magazine.

Creating a best-seller of a product or service isn’t easy. And CEOs further make the task tougher by encouraging their employees to innovate further on a successful prototype. It’s a strategy that spells disaster. Forbid improvisations.

Despite outcomes over the years having proven why toil for the sake of radical innovation was a delusion, hundreds of billions of dollars continued to be flushed out from coffers of companies in the hope that the risks would pay dividends. As per the 2011 Booz Allen Hamilton’s Global Innovation study, in just the past three years, the world’s top 1000 R&D spenders have burnt over $1.57 trillion in the labs. Globally, the US Center for Science and Engineering Statistics, concludes in a 2012 report that R&D expenditures over the past decade has increased at a CAGR of 7%, from $640 billion in 1999 to $1.28 trillion (in 2009). And the payoffs? Prof. David Midgley of INSEAD, in his book, ‘The Innovation Manual’ writes: “Innovation is one of the least well-managed areas in most companies. It leads to wasted resources and costly mistakes. ” Booz Allens 2011 report has explains the futility of spending big in R&D in a line: “Spending more on R&D won’t drive results!”

Against this backdrop, it become important for companies to adopt a disciplined approach in their quest for innovation. More important is to harness any innovation that is born – products and processes. This is where organisations need to necessarily integrate exnovation as a critical process within their operational structures and make it a vital part of their cultures for innovation to work. As Jaruzelski, Loehr and Holman of Booz Allen conclude in their Winter 2011 R&D report, “The elements that make up a truly innovative company are many: a focused innovation strategy, a winning overall business strategy, deep customer insight, great talent, and the right set of capabilities to achieve successful execution. More important than any of the individual elements, however, is the role played by corporate culture – the organisation’s self-sustaining patterns of behaving, feeling, thinking, and believing – in tying them all together. According to this year’s Global Innovation 1000 study, about half of all companies say their innovation strategy is inadequately aligned with their overall corporate strategy.” Lesson: To innovate is good. To harness the potential of each innovation and make such a practice central to the organisational philosophy of growth and sustainability is more important. And that is where exnovation steps in. Creation of a winning overall business strategy by leveraging focused innovation with great talent that has been trained with the right set of capabilities to achieve standardised execution targets is what exnovation stands for.

Exnovation only means the opposite of innovation to an extent. It does not signify distancing the company altogether from innovation (and the associated risks attached to R&D) and the wealth it can bring to shareholders. It’s about keeping a check on the flow of innovation in your company. A process is tested, and if the popularity of the final product is found to bear the potential of spreading like wildfire in the market, it is mastered within an innovation group in the organisation. The next step is to put in place a critical system that ensures that this process is replicated (“copied blindly”) across branches, departments and groups within the organisation depending on the validity of the discovery. To ensure that the process is implemented unaltered and uncut is important. No employee or manager within the organisation should be allowed to tailor the process for whatever reason. Translation: Innovation gives an organisation the much needed big leap. But only if favourable processes are passed on and repeated over and over again by concerned team(s), with a strict check on non-customisation by any ‘unauthorised’ personnel. Individuals in specalised innovation groups are the only ones who should be given the liberty of access to the R&D budget. Not everyone. Reason being the same as why every employee in an airline does not get to occupy the cockpit, and every defense personnel is not a commanding officer.

It’s a prescient story line. Employees want to innovate. They ‘all’ think they can. Only a chosen few actually succeed in building something worthy of their ideas. It’s the same reason why it took two different Steves (working at the same company) to conceptualise and build the Macintosh and the iPhone in two different eras. Your employees cannot be given the right to test their fortunes at will. Never at the cost of shareholder and company assets. As a justification to this argument, Prof. Clayton M. Christensen of Harvard Business School, in a May 2012 paper titled, ‘Five ways to make your company more innovative’, writes, “I don’t want to overstate the case. I think about 40% of people just are not going to be good at innovating regardless of what they do.” So what is the proportion of people in your company’s educated workforce that stand a chance of justifying your R&D dollars? Christensen puts it like one not remotely confident of taking a chance of allowing every employee in the supply chain to innovate. His number? “5% are born with the instinct. There are things that they do and ways that they think that are intuitive. The rest of us could learn what these innovators do if somebody would just crawl inside their brains and codify what to them is intuitive.” That last part of course is not a possibility. Our argument stays. Don’t bet on 95% burning cash. Teach them ‘exactly’ what the other 5% have pioneered.

Think of great companies selling great products. CEOs that made these companies turn good (or nothing) to great have mastered the science of exnovation. These visionaries have methodically thumbed out the links on the process chain, setting up exnovation units in their organisations – manned by supervisors who ensure that successful processes that have led to authentic and profitable results in the past are replicated to the hilt, each time, by each employee – thus curtailing employee independence to tamper with the set procedures without formal instructions from the supervisors. This practice of deploying a process-orientated strategy is what helps them make money for their shareholders without breaking a sweat. Prof. Stefan Thomke of Harvard Business School (in his May 2012 treatise titled, ‘How can a company balance creativity and innovation with the need for process and structure?’) makes a compelling argument to justify why for an innovative company too, to be process-oriented. He concludes, “Innovation and process within a firm can coexist and even feed off each other, if you manage their different and sometimes opposing functions smartly. Indeed, if you want to be an innovative company, you can’t be one without process and structure.” In the August 2010 report titled, ‘Leading your business to innovation’, published by the Australian Government’s Department of Education, Employment and Workplace Relations and The Industry Skills Council of Australia, it is clearly stated that “Innovation involves creating cultures and systems that effectively sustain innovation. Teams are a major tool for promoting internal and external collaboration. Over 100 independent studies have found that having shared goals in a business is one the most influential factors for innovation. Significantly, team leaders play the critical role in providing teams with such clearly stated, shared goals.” Evidently, such shared goals cannot be established without providing adequate training to employees and putting in place exnovation teams who champion the process to replicate the innovation model. And this is one problem with the current understanding of innovation, as Prof. Gary Hamel of London Business School quotes in LBS’ Business Strategy Review. The Spring 2006 paper titled ‘Inside the innovation lab’ states, “Hamel, and others, have been espousing the benefits of innovation for some years now. At one level, executives appear to be getting the message. They know that they can’t do the same things. Innovation is routinely identified by companies and their leaders as a top priority. The rhetoric is convincing, but is often followed by inaction. The problem, says Hamel, is that employees lower down the corporate hierarchy have not been trained and there are few processes or support mechanisms. Hamel compares our current understanding of innovation with the business world’s understanding of quality in 1970. At that time, people knew that quality was important but didn’t know the processes or systems which could enable quality to happen.” For innovation to be really nurtured therefore, Hamel, recommends a solid process to be established, with clear messages and training being passed on to employees.

Over the decades, iconic CEOs have been associated with supporting a culture of innovation. But it was this group for whom putting in place a process-oriented system to allow innovation and associated best practices to seep through their organisational walls was religion. They learnt early on that after the discovery, comes the hard part. And to tackle those challenges, they took it upon themselves to implement a process of exnovation in their companies. Iconic CEOs. Think of Steve Jobs. The secret to Jobs being considered one of the greatest innovators in the world lies in his habit of being a compulsive exnovator. Many have written about an ‘i’ that he was most known for: ‘i’mpatience. Allow us to clarify how he Exnovation was as much about patience and careful decision-making when it came to exnovation. It was the first day of the week in the autumn of 2007. Apple was scheduled to launch its most important product yet – the iPhone – in a month’s time. Jobs realised that the R&D team had not done a convincing job with the product. In a meeting with 50-odd employees, he declared: “I just don’t love this. I can’t convince myself to fall in love with this. And this is the most important product we’ve ever done. All this work you’ve done for the last year, we’re going to have to throw it away and start over, and we’re going to have to work twice as hard now because we don’t have enough time.” He was unhappy with the enclosure design for the first iPhone. What Apple managed in a month’s time thereafter changed not only the way the first three versions of the iPhone were to appear but also how the world would thereon perceive smartphones. Jobs had in mind the set process at Apple. He knew that a design that walked out of his R&D lab would be replicated from head to toe and because his engineers would not be allowed to add even a touch or two in the name of “improvement” thereon, he wanted the iPhone prototype to be perfect. This strict adherence to process-orientated exnovation is what has earned Apple its fans – be it the iPod, the iPhone, the iMac or the iPad! Talking about what makes innovation successful, Prof. Midgley of INSEAD writes in his book (‘The Innovation Manual’), “It’s not the effort that companies put into innovation that decides success. Instead it is how firms go about doing innovation that separates leaders from the rest.” He goes on to describe how the Apple iPod has sold hundreds of millions of iPods since introducing them in 2001 “not because the iPod is an innovative product. The real point behind the iPod is the business model that allows both Apple and the music industry to make money.” In short, the process that Jobs put in place to make, market and milk a product at Apple makes him the visionary that we knew him to be.

Today, Apple is still a company that believes in exnovation and zero-independence to its engineers to change products every now and then (that has been the case ever since Jobs returned in 1987). Google isn’t. Its doodles, beta versions of applications et al, are proof how its open “innovation” culture allows its engineers (at Google X Labs) to experiment with the company’s products on almost a daily basis. Compare how this difference in innovation culture has had an impact on the market values of these two firms over time. Precisely five years back (endQ3, 2007), Google was more valuable that Apple ($122.86 billion as compared to Apple’s $118.30 billion). Today, its m-cap is almost 1/3rd (35.4%) of that of Apple’s ($231.46 billion as compared to Apple’s $656.27 billion, as on September 22, 2012). As Prof. Thomke of HBS writes, Apple’s genius lies in the ability to get to the heart of a problem and not settle for convoluted solutions until they find, the key, underlying principle of the problem and then the beautiful, elegant solution that works.” Jobs ensured that this beautiful, elegant solution once found is cloned – processor by processor, code by code! [Tough task considering Apple outsources 100% of its manufacturing! But he did.] And that is what Tim Cook, his successor has carried forward at the company. Even today, to ensure that set production procedures and quality levels are not tampered with and that there is 100% adherence to exnovation, Apple buys material and equipment on behalf of its suppliers like Foxxcon, Jabil, Pegatron et al. Little wonder that Apple has grown into this most valuable company in the world today (miles ahead of the #2 Exxon Mobil, whose m-cap stands at $426.03 billion).

From the most valuable to the most profitable. Exxon, is the largest corporation in America – both in terms of revenues ($452.93 billion in FY2011) and bottomlines ($41.06 billion). This petrochemical company is an example of how duplication of set methods comes around as a greater good than new, daily innovation. The last time Exxon introduced a real innovation in its upstream activities was in the World War II era when it invented the naptha steam cracking technology. Till date, whether it be in the oil fields of Russia or Iraq, the company uses the very same technology to refine oil. The company’s CEO Rex Tillerson does not believe in fanciful connections about ‘futuristic’ innovations and payoffs. Even when the world was going loud about bio-fuels, Tillerson was hellbent to stick to fossil fuels. “I am not an expert on biofuels. I am not an expert on farming. I don’t have a lot of technology to add to moonshine. Because to just go in and invest like everybody else – well, why would a shareholder want to own Exxon Mobil?”, he had claimed. Explaining his attitude to innovations in fuel production, especially green fuels, Fortune magazine wrote, “The other supermajors are all proclaiming their greenness and investing in biofuels, wind power and solar power. Exxon (Left-Right) Adopting exnovation to maximise shareholder return: Rex Tillerson, CEO & Chairman, Exxon Mobil, Michael T. Duke, CEO, Walmart and Jack Welch, Former CEO & Chairman of General Electric Co. are examples of CEOs who maximise the potential of each innovation by believing in exnovation. They inspire leaders of companies to work on a structured, training-intensive and process-oriented strategy and not encourage every passerby in their companies to improve on prototypes isn’t. At Exxon it’s all petroleum. Why isn’t the company investing in less polluting energy sources like biofuels, wind, and solar? Remembering that Exxon is above all in the profit business, we know where to look for the answer. As a place to earn knockout returns on capital, alternative energy looks wobbly. Exxon just doesn’t know much about building dams or burning agricultural waste. Its expertise is in oil and gas.” To consider an example, in the current times, oil majors are all investing in Floating Liquefied Natural Gas. This technology requires innovations to be introduced into the production process. Exxon hasn’t stepped into that room yet. Exnovation creates wealth for its shareholders. And despite many-an-objection raised by environmental groups around the world, the company claims that oil majors (and even governments!) are fast recognising how its process-orientation post-innovation represents the most viable approach (leading to profitability) in this industry. In a company discussion report, Exxon claims that the initiatives Federal and State governments define as “energy efficiency opportunities” is only “for the most part an attempt to duplicate business processes that ExxonMobil already undertakes on a global basis.”

The only thing more palpable about Exxon than pride is confidence in its track record of having made billions out of replicating technologies that mostly others developed from scratch. In fact, as a solution to reduce CO2 emissions from non bio-fuels, the solution that Exxon provides is called CCS – Carbon Capture and Storage technology. And how does the company suggest we go about it? Mirror past practices. It recommends: “The scale, significant investment and required new infrastructure cannot be overlooked. The concept includes potentially duplicating the oil and gas industry’s infrastructure and pro-What Walmart did to earn $447 billion in revenues in 2011 was follow the supply chain process 100% & innovate 0% cesses – which has been built over 100 years.” At 10.47%, Exxon not only enjoys the highest net profit margin amongst all Big Oil supermajors (in FY2011; others include RoyalDutchShell, BP, Chevron, Total S.A. and ConocoPhillips), but also the highest return on assets (9.48%). Do exnovation critics need a bigger proof than Exxon?

From the largest to the second-largest. Walmart. Whatever Walmart did to earn $446.95 billion in revenues last year was nothing but follow the supply chain process 100% and innovate 0%. To say that the company is very different from other retailers would be wrong. At least on the innovation scale. It does not believe in reboots. From using a satellite-based IT system (developed more than 60 years back) to exploiting an inventory management system that came across as a common-sense more than three decades back (called ‘Float’), Walmart ensures that its retail outlets adopt a standard look and approach to the millions of customers who walk into them each day. It focuses on imparting training to its employees and managers, teaching them standardised and time-tested techniques with an aim to make ‘Save Money. Live Better’ slogan global. Be it imparting hands-on training to all its employees to operate the data delivery and reporting Retail Link software that is used across 8,500 stores in 15 countries and the Sam’s Club retail warehouses in North America, be it educating them about Walmart’s 50 year-old pricing strategy (‘to provide value for its customer’s hard earned money’ by doing everything to reduce costs at the warehouses and stores) through workshops, or be it giving each manager at the company a week-long cultural at The Walton Institute at the University of Arkansas (where they are primarily imparted lessons to solve problems that help eliminate business risks), Walmart is one that doesn’t take pride in innovation, but in reproducing processes. Perhaps the only innovation that has been introduced at Walmart in the past five years is a change of attire of its sales associates: from blue t-shirts and jeans to khaki pants and polo shirts!

When Jeff Immelt first walked into GE’s corner office in September 2001, the first thing he did was throw a billion dollars into GE’s R&D centre. [And of that $100 million was just to ‘renovate’ GE’s New York research centre.] “I made the businesses themselves spend more in R&D. And we started getting a flow of technology,” said Jeff Immelt in June 2006. So how did this new focus on constant innovation and flow of new technology born there-with help the company’s shareholders? When Immelt took over, the company, under a “strictly process-oriented” Jack Welch, had become worth $415 billion. In 11 years (as on September 18, 2012), under Immelt, the process turned-innovation driven company has lost 44.1% of value! This is how Immelt described his gut-feel a decade back: “After I came in as CEO, I looked at the world post 9/11 and realised that over the next 10 or 20 years, there just was not going to be much tailwind. It would be more driven by innovation. We have to change the company to become more innovation driven – in order to deal with this environment. It’s the right thing for investors.” He did nothing wrong by focusing on innovation. What he did wrong was that he tried to kill Welch’s process-orientation philosophy at the company. Immelt forgot that innovations once got, and those with a potential to give birth to multi-billion-worth selling products and services should not have been tampered with. And that is despite the fact that he knew why exnovation scored over innovation, as he said, “I knew if I could define a process and set the right metrics, this company could go 100 miles an hour in the right direction. It took time though, to understand growth as a process. If I had worked that wheelshaped ‘execute for growth process’ diagram in 2001, I would have started with it. Jack was a great teacher in this regard. I would see him wallow in something like Six Sigma.” What Welch did was that he created a culture of exnovation at GE, which Immelt calls a “formidable toolkit and mindset to maintain bottomline discipline”. Jack Welch wasn’t against innovation. He just paid more importance to ex-novation. From his firing rule to his quality maintenance six sigma system, from teaching brains at GE the ‘common’ culture and organisational philosophy at the company’s Crontonville Training Centre and GE Management Academy, Welch ensured that all best practices at GE were shared with all concerned. And those who didn’t fit into Welch’s process-oriented culture, were given the boot. As Ron Ashkenas, Managing Partner of Schaffer Consulting and co-author of the book, ‘The GE Work-Out’, writes in a 2011 HBR article titled, ‘You Can’t Dictate Culture – but You Can Influence It’, “The real turning point for GE’s transformation came when Jack Welch publicly announced to his senior managers that he had fired two business leaders for not demonstrating the new behaviours of the company – despite having achieved exceptional financial results.” Welch was the CEO. He behaved like one. And he knew, process-orientation and exnovation would work best for his shareholders. Not surprising, when he left GE in 2001, he had created the world’s most valuable company. For him, it was as simple as allowing a group of research scientists to work on the most efficient aircraft engine, but not allowing ‘every’ technician to try out combinations with the blades to achieve greater efficiency. That would mean ambush in a world where competition is the sniper.

Would America’s top airlines that boast of the best on-time performance (OTP) record like US Airways (OTP of 86.99% in March 2012), Delta Air Lines (84.96%), Alaska Airlines (84.53%), American Airlines (80.83%), Jetblue (79.9%), United-Continental (75.77%), and Southwest (74.33%) maintain their neat records had each of their crew members and pilots innovated with each departure? Would the world’s best luxury hotels like Tower Suites at Wynn Las Vegas (Most luxurious as per Forbes), Lodge at Sea Island on the Georgia coast (Most unique), Boston Harbor Hotel in New York (Best turndown service) et al, remain as famed if lobby managers and hostesses are allowed to add their individual touches of genius in the name of innovation? Would Chinese steel companies like Hebei Iron and Steel, Baosteel and Wuhan grab a spot in the world’s top ten steelmakers (World Steel Organisation, 2011 report) if they experiment with each ounce of steel during the smelting process? Not a prayer! Talking about why innovation alone does not suffice, Scott Berkun, author of the May 2007 book, ‘The Myths of Innovation’ writes, “Competence trumps innovation. If you suck at what you do, being innovative will not help you. Business is driven by providing value to customers and often that can be done without innovation: make a good and needed thing, sell it at a good price, and advertise with confidence. If you need innovations to achieve those three things, great, have at it. If not, your lack of innovation isn’t your biggest problem.” This thought throws light on another important principle of exnovation. For a multinational, operating in different geographies may pose region-wise problems, owing to differences in consumer behaviours as compared to the parent market. In such cases, set processes would require innovation – incremental innovation.

When a firm comes to face with such a situation, where such a change is required, chosen individuals in the exnovation unit should be vested with the authority to tailor the process to suit needs of a geographical market. Take for instance the case of Haier in China. In 2004, in China’s Sichuan province, on attending a service request call, a company technician found that the washing machine was clogged with mud. He learnt that residents in that region were using these machines to wash sweet potatoes and other vegetables. The company engineers modifed the washing machine’s washer unit to make it suitable for vegetable cleaning! Since then, Haier’s washing machines are being sold in Sichuan with a new label: “Mainly for washing clothes, sweet potatoes and peanuts”. This was not the only market specific modification that the company made. In Shanghai, for washing summer clothes (where greater volumes of light clothes are cleaned each day), the company introduced a small washing machine that cleaned two or three pieces of clothing at a time. This saved water and electricity for the city dwellers and became a hot-selling product in Shanghai. Also across cities in China, the company marketed small-sized refrigerators for urban dwellers to save on space. These instances prove how Haier understood the geo-graphic context well and introduced innovation through their exnovation units. As Harvard Professors Tarun Khanna and Krishna Palepu document in their book titled, ‘Winning in Emerging Markets’, “Most critical to Haier’s success in building a highly competitive business in its home market were the company’s attempts to change the market context by filling institutional voids.” So we repeat – if changes in established processes are to be made to suit geographic needs, empowered heads of ex-novation teams should recommend it to the senior management, so that the changes in product(s) can be formally introduced. It then becomes a process which should not be tampered further.

Exnovation is not about saying no to innovation or killing innovation at the roots. It is about hammering out a process-oriented strategy and avoiding overhauls of process models that have given birth to products that have already been introduced in the marketplace. Everybody in your organisational circle cannot innovate. Hard to swallow, but it’s the given truth. Most of them can’t. Teach them the best-seller of a process that a lucky few have been gifted to generate. And it is these very gifted minds that should be put in charge of exnovation units to keep a check on processes and structures throughout the organisation and to innovatively improve them when the geography demands so.

Jobs of Apple, Welch and Coffin of GE, Mulally of Ford, Tillerson of Exxon, and many such names are proof that what the world assumes to be the magic of innovation, is actually one created with great exnovation. Exnovate and your corporation thrives. Simply innovate with no process in place, and all the dollars you fed the lab rats with will be soon forgotten. So will that idea which could have potentially grown into a best-seller.

Thursday, January 10, 2013

This article was featured as a part of the IIPM-Cornell-B&E Joint Study cover story on 'Inside China' that appeared in the August 2012 Issue of Business & Economy magazine

The potential of China as a consumer market better not be ignored by visionary corporations. Sadly, most companies in India are yet to realise this.

Why in heavens would I decide to write about China when everybody around has been harping on China almost day in and day out. Because while everybody around has been simply comparing Chinese growth and India’s growth (and complimenting China to no ends), I find no economic commentator exhorting Indian firms to partake of Chinese growth by thinking about setting up companies in China, or by selling their products and services to Chinese consumers! Each day that passes with you as a CEO not thinking about setting up a business in the world’s fastest growing market – and the largest in a few years (as of 2011, China’s GDP is worth $7.30 trillion, according to National Bureau of Statistics of China, NBSC) – is a day lost with criminal intent! The statistics are devastating – if you have even an iota of cash to spare, go the China way!

Just a few decades back, marketers would have ridiculed the very idea of setting-up shop in China, where per capita income stood at a sheepish 1% of USA’s. Not to say that during those days, the Chinese GDP was one that was consciously ignored during discussions in economic forums, more so due to the defiant communist regime, which was more intent on autocratic uplifting of masses than on blindly promoting capitalism. But China was growing because of that same upliftment of masses. After having broken through the $100 billion ceiling in 1988, the foreign trade figure of China ran past the trillion-dollar mark in 2004. Today, it has touched $3.64 trillion (2011; April 2012 report by WTO Secretariat), and much water has flown under the Shanghai bridge, bringing in a dramatic macroeconomic improvement. [It has been forecasted by the Chinese Commerce Ministry that by 2015, this international trade figure will top the $5 trillion mark.]

China is now the second-largest economy in the world, and its per capita income as a percentage of that of USA’s has increased to 14.2% (quite a rise from a value of $180 in 1990 to $6,567 in 2009; IMF). That China is turning into a huge consumption behemoth – one that Indian companies should exploit to whatsoever extent – is supported by many economic indicators. Over the past six years (2005-2011), the growth of imports into China has exceeded exports from the nation. The CAGR difference is 2%. During more recent years, this gap in growth has been more marked. In 2010 and 2011, growth in imports exceeded that of exports by 8% and 5% respectively. Even in absolute value terms, China has steadily begun charming onlookers as a consumer (import) market. In 2005, at $645.66 billion, imports constituted 45% of the total foreign trade. Last year, at 1.74 trillion, this rose to 48%. Today, China is the world’s second largest importer of goods and services after US (whose import value stood at $2.27 trillion in 2011; WTO).

With incomes rising in China, the day isn’t far when China will get talked about less as a low-cost nation and more as a lover of imported high-quality and luxury products! The phenomenal rise in per capita income of Chinese nationals (a jump of 1,309.7% for urban dwellers to $3,755.90 and 896.71% for rural Chinese to $1092.82 over the past two decades; data by NBSC) translates into a staggering jump in consumption when seen in the light of the fact that this growth happened for 1.4 billion individuals!

In support of China’s domestic comes a September 2010 paper by McKinsey consultants Horn, Singer and Woetzel, titled, A True Picture of China’s Export Machine, which shuns the age-old method used by the government to calculate the contribution of total exports to GDP growth. As per the paper, “Net exports have contributed to only between 10-20% of China’s annual 10% GDP growth in recent years,” while “domestic value-added exports [which is the net of to tal exports and those imports used in the production of goods & services exported], contributed to between 19-33% of the total GDP growth.” To sum up the discussion in favour of the Chinese domestic market, the report which uses the McKinsey Global Institute China urbanisation model, concludes, “The most common wisdom overestimates the role of exports while underestimating the role of domestic consumption for China’s growth. Any Chinese or MNC that currently manufactures goods in China and primarily exports them to other countries should ask itself whether it needs to scale up its domestic strategy to get a bigger piece of the pie.”

The truth, which the tallest of sceptics concede, is that China is the next powerhouse for the world’s sellers, across industries. Pulitzer Prize-winning Thomas L. Friedman wrote in an NYT column from Tokyo, “Those leaders of Japan, America, Australia, Taiwan, Malaysia, Russia, Thailand, Indonesia, Singapore, the Philippines, or the European Union, who are not going to bed each night saying a prayer for China are not paying attention.” The 2010 China Consumer Survey report by Credit Suisse explains how, “Chinese households are earning more but saving less.” Household income of the bottom 20% has risen by 50% since 2004, while the top 10% has grown 255% to around RMB 34,000 per month. The savings rate has dropped from 26% to 12% during the same period. Credit Suisse expects China’s share of global consumption “to increase from 5.2% at $1.72 trillion in 2009 to 23.1% at $15.94 trillion in 2020, overtaking US as the largest consumer market in the world.”

We take a look at specific industries and the lessons that corporations which have paid due respect to the Chinese domestic market have to impart. In 2009, China became the largest auto manufacturing nation in the world, with 13.79 million units rolled out, thereby surpassing Japan as the largest automobile maker in the world. No surprises there as a major chunk of these would be exported subsequently, right? Wrong. Of these manufactured cars, only 369,600 units were exported – 97.3% of the cars manufactured in China were sold in China! In 2011 too, of the 18.5 million units manufactured in China, only 814,300 were exported. In other words, 95.6% of the cars made in China were sold in China. During the past three years, over 50 million units of automobiles have been sold in China (50.21 million to be precise) – not surprising therefore is the forecast that the number of registered vehicles with Chinese number-plates will rise from the current 100.17 million (as of end-August 2011; China’s State Statistical Bureau) to 200 million by 2020 (China’s Ministry of Industry and IT).

Talking more about cars, here are some interesting facts. First, for the past three years, GM has been selling more cars in China than it does in its home market US. (In H1, 2012, it sold 1.42 million units in China as compared to 1.10 million units in US.) China is the only overseas market where GM sells more cars than in US. The company plans to touch 3 million in annual sales count in China by 2015. Its Detroit cousin, Ford, set a new record in monthly sales in June 2012 (for the third month in a row), selling 18% more cars than it did a year back. Germans Audi, BMW and Daimler are also gearing up to set a new annual sales record this year, boosted by deliveries in China, where they presently sell more vehicles than in Germany. In fact, as per a the Chairman of the Board.]

There are many other names whose walk in the dragon’s den tell you why China is the place to bet on and sell. General Electric, the $150 billion-a-year topline-earning conglomerate’s revenue from emerging economies is set to increase from the current 22% to 30% by 2014. And in its attempt to make China count, the company plans to increase this market’s contribution to its topline from the current 4% to about 25%!

P&G, the world’s largest producer of household and personal care products, which is increasingly focussing on the Chinese market, has now got China as the #2 contributor to its sales volumes and #4 in terms of topline for the company. Today, the company commands 50% of the shampoo and 40% of the personal hygiene market in China, a market which accounts for 25% of the 4 billion customers that P&G has globally.

The world’s largest manufacturer of aircraft, Airbus, which gets 20% of its revenues from China also has big plans for China’s business jets market. China, as per Airbus Corporate Jetliners, is already the fastest growing market for corporate jets, and accounts for 25% of its global sales. The European expects a total of $349.3 billion to be spent by China’s airlines on acquisition of new aircraft by 2025 (#2 after US’ airlines, that are expected to spend $538.1 billion; as per Boeing, by 2030, China will spend $400 billion to buy 3,770 new planes), is smiling at the moment. So is its rival Boeing. Though at present, the Chinese sky has more of Airbus aircraft flying around (820 as compared to 753 Boeing aircraft), the unfilled order count until June 30, 2012 (with Boeing’s 314 being greater than Airbus’ 270) does make the battle appear evenly poised. The battle scorecard reads: Airbus: 1090 Vs. Boeing: 1067. Just a sign of how the two largest aircraft makers (which control 99% of the world’s commercial aircraft market) have already picked up some dragon-dancing steps!

From engines in the air to air waves – Nokia. If you think India was all that Nokia has left to hinge its hopes on, rotate your globe a little to the left. China houses the world’s largest count of mobile users (1.034 billion) and therefore is the most critical minefield for the cellphone maker. Any outcome there would impact the Finn doubly. Here’s proof: It was in the fourth quarter of 2011 that Nokia lost its pole position in the Chinese market for the first time in eleven years. Samsung with a market share of 24.3% ran past Nokia (19.6%; Gartner). The effect showed on global figures just a quarter later. In Q1, 2012, Samsung became the highest seller of handsets in the world (20.7% share versus Nokia’s 19.8%). And all this in spite of the fact that in India, Nokia remains the #1 by a long margin (38.2% share versus Samsung’s 25.3%; Cybermedia’s VoiceData’s 2012 report). Lesson – Don’t just breathe in China. Dominate. Or else even your performance in the 929 million-strong Indian market won’t count (TRAI).

The dozens of steel-making companies to the chipmakers of the world, from fast-food chains to the biggest of retailers, from far-away America to close neighbours, companies across continents are fast realising that one big learning of their career remains the Chinese consumer tale. If they lose out on it, they’ll have little left to survive on. Two decades back, the Chinese low-cost manufacturing prowess took the world by storm. Now, it’s the age of the Chinese consumer.

Sadly, there are not many Indian case studies to write home about – and that is what I call “criminal”.

Till the time every Indian firm’s CEO believes in having the vision of tapping the Chinese market, India can in no way think of beating the Chinese bandwagon.